Bank of Italy instructs banks to avoid bonus, dividend pay-outs

Following an audit of Italian banks, the Bank of Italy, the nation’s central bank, has instructed banks to up provisions set aside against bad debts and to avoid paying out bonuses and dividends.

“It is…necessary that the banks adjust their total loan loss provisions to the current and future development of the economic context,” the central bank said, adding that it expected a “significant reduction” in bonuses based on last year’s performance, Reuters reports.

Banks with a Tier 1 ratio below a target established by the Bank of Italy, which the central bank did not disclose, were asked to not pay out dividends, while those banks that exceeded the Tier 1 ratio target by only one percent had to contain dividends within 50 percent of profit.

The sustained economic crisis in the euro-zone has increased the number of bad loans among Italian banks, and bad loans now represent 12.2 percent of all loans on average at the end of last year, an increase from 4.5 percent in 2007. The number of bad loans has forced some Italian banks to increase their coverage of bad debt from 42.3 percent before the crisis to 50.6 percent, according to Reuters.

The central bank conducted its two- and three-month long audits across between 20 and 30 large Italian financial institutions.